Monthly Market Snapshot

Continuing our review of elevated issuance trends across fixed income markets, this month we turn to municipal (“muni”) bonds. Muni issuance is on pace to reach approximately $600 billion in 2026, which would mark a third consecutive year of record supply.

Annual Municipal Bond Issuance

The heavy supply of munis has been driven by higher project costs and fading pandemic federal aid, combined with issuers’ acceptance of higher rates. New 10-year paper is currently pricing near 3.2%, a taxable-equivalent yield above 5.4% at the top bracket. These yields have attracted sufficient buyers to absorb the increased supply through the first half of the year.

Q2 Recap: Credit Shines as Fixed Income Delivers Broad Gains

  • Despite a rise in Treasury yields during the second quarter, most fixed income sectors delivered strong returns as credit spreads tightened, and income remained a positive contributor to performance.
  • Investment grade and high yield corporates outperformed Treasuries, while municipal bonds posted strong gains across the curve.
  • The Bloomberg US Aggregate Index (the Agg) returned 0.67% in the quarter. Year-to-date returns now stand at 0.62%. All sub-sectors of the Agg delivered positive absolute and excess returns, with corporates outperforming and mortgages and ABS generating solid gains.
  • Investor demand for spread products remained robust, helping offset the impact of higher rates and supporting broad-based credit market performance. Spreads tightened in the quarter across every sector across both investment grade and high yield corporates.
  • The Fed held rates steady at Kevin Warsh's first meeting as Chair, but a more hawkish policy stance, reduced forward guidance, and a renewed focus on inflation signaled a potentially higher-for-longer rate environment.

Market Summary

The broad fixed income sectors generated positive absolute returns in the second quarter. Credit-sensitive sectors outperformed Treasuries as spread tightening was broad-based across both IG and HY corporates.

YIELDS & RETURNS (%) 1

U.S. Treasury Market

Treasury yields moved higher during the quarter, led by the front end of the curve. The increase was most pronounced in 2- and 5-year maturities, while long-end yields were relatively stable.

TREASURY YIELDS (%) 1

Treasury returns were mixed across maturities as higher yields pressured intermediate-duration bonds. Longer-dated Treasuries produced gains, benefiting from relatively stable long-end rates and higher income.

TREASURY RETURNS (%) 1

Investment Grade

The Bloomberg US Aggregate Index (the Agg) posted positive absolute and excess returns in the quarter, as did each of the underlying sub-sectors. Long and intermediate corporates led performance, while asset-backed securities and mortgages also generated solid absolute and excess returns.

INVESTMENT GRADE INDEX & SECTOR RETURNS (%) 1

Investment grade spreads tightened during the quarter, reversing much of the widening experienced earlier in the year. Improving risk sentiment and continued demand for corporate credit supported spread compression across most segments of the market.

INVESTMENT GRADE SPREADS (basis points) 1

Lower-rated investment grade bonds outperformed higher-quality counterparts. BBB-rated issues generated the strongest returns, while AAA and AA bonds lagged despite posting positive returns.

INVESTMENT GRADE CORPORATE CREDIT QUALITY RETURNS (%) 1

Spread tightening was broad-based across investment grade sectors during the quarter. Financials, transportation, and basic industry sectors experienced some of the largest improvements, while communications tightened the least.

INVESTMENT GRADE CORPORATE BOND SPREADS BY SECTOR (basis points) 1

High Yield

High yield bonds delivered strong returns in the quarter as tightening spreads and elevated yields supported performance. Lower-rated B and CCC credits outperformed higher-quality BB bonds, reflecting improving risk appetite.

HIGH YIELD SECTOR RETURNS (%) 1

HIGH YIELD OPTION-ADJUSTED SPREADS (OAS) (basis points) 1

High yield spreads tightened across all sectors. Transportation, technology, and financial issuers experienced the largest spread improvements during the quarter. Year-to-date spreads are now tighter in 4 of the 10 corporate sectors.

HIGH YIELD CORPORATE BOND SPREADS (OAS) BY SECTOR (basis points) 1

High yield default activity remained relatively low despite a modest increase in the quarter.

HIGH YIELD DEFAULT RATES 2

Municipals & Other

Municipal bonds generated positive returns across all maturity segments in the second quarter. Longer-duration municipals led performance as yields declined across much of the municipal curve and investors continued to seek tax-exempt income.

MAJOR MUNICIPAL BOND INDEX RETURNS (%) 1

MUNICIPAL YIELDS BY RATING CATEGORY AND MATURITY (%) 1

AA MUNICIPALS – HYPOTHETICAL AFTER-TAX YIELDS BY EFFECTIVE TAX RATE (%) 3

Emerging market debt performed well in the quarter, benefiting from positive risk sentiment and attractive yields. Convertibles also delivered exceptional returns.

OTHER SECTOR RETURNS (%) 1,4

Bond Rating Categories

Standard & Poor’s Ratings Group

AAA An obligation rated “AAA” has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.

 

AA An obligation rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

 

A An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher- rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

 

BBB An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these Q2 be outweighed by large uncertainties or major exposures to adverse conditions.

 

BB An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

B An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

 

CCC An obligation rated “CCC” is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

 

CC An obligation rated “CC” is currently highly vulnerable to nonpayment.

 

C A subordinated debt obligation rated “C” is currently highly vulnerable to nonpayment. The “C” rating Q2 be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.

 

D An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

 

For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the CI SBH Asset Management Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. One cannot invest directly in an index. All opinions expressed in this material are solely the opinions of SBH. You should not treat any opinion expressed as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this material does not constitute financial, legal, tax or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s statements and opinions are subject to change without notice, and SBH is not under any obligation to update or correct any information provided in this material.

 

1 Source: Bloomberg.

2 Source: Bank of America Merrill Lynch.

3 Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.

4 Source: Standard & Poor’s.